Corporate Governance in High-Tech Companies

Corporate Governance in High-Tech Companies
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Executive Summary
In the current era, corporate governance has been implemented in many corporations in order to enhance business growth. Corporate governance is a method by which many corporations are controlled, directed and administered. To begin with, the paper traces the roots of the selected high-tech company back in San Francisco. It also highlights the industry YELP operates in. Secondly, the essay goes on to reflect on the eight steps a company needs to take to apply corporate governance. Thirdly, it goes on to expound on the application of corporate governance at Yelp. In other words, which steps has Yelp taken to apply corporate governance. Fourthly, the essay goes on to highlight the ownership structure and partners of Yelp. Fifthly, it compares the corporate governance of corporations in US and China. Sixthly, it highlights the strengths and weaknesses of corporate governance on YELP. Last but not least, it makes recommendations for the highlighted weaknesses
Introduction
There has been an increase of importance of high tech companies for the past several years. Such companies are the pinnacle of innovation and invention. Although many established companies can become effective market leaders through fine-tuning, high tech companies normally need to start from the bottom. They derive strength from the company innovation provided by its development and research function. In the middle of chaotic and competitive surroundings, the importance of innovation cannot be understated. However, in order for a company to guarantee good returns, it must have good corporate governance. Corporate governance is often seen as the combination of administration strategies that ensure the company management runs the company in the various interests of stakeholders and shareholders. To add on that, it can also be viewed as the cultural, legal and institutional policies the actions of corporations, the people controlling them and how the risks and returns are distributed. It will be interesting to investigate the relationship between the company and its corporate governance as well as the relationship between the high-tech industry and the corporate governance of the company. This essay purposes to highlight the cooperate structure of YELP company. Additionally, it will also focus on the weaknesses by comparing the situation between United States and China.
Background Information on Yelp
Although the components of valuation of high tech companies are similar, their emphasis and order is different from the traditional methods of companies that are already established. One such company is Yelp, a popular online company that reviews local businesses using the company’s public data. With origins in San Francisco, the company serves approximately 150 cities on a global scale.  In the year 2004, former PayPal employees, Russel Simmons and Jeremy Stoppelman raised $1 million to fund a glorified "e-mail circle" that allowed friends to directly exchange business reviews. This circle is now known as Yelp. In 2014, the site celebrated its 10th anniversary with a staggering valuation of $5 billion and some 130 million unique visitors every month. From 2009 to 2014, the company’s revenues experienced a massive growth from $ 26 million to $ 378 million showing a compound growth of 71%. Part of this growth is attributed to $100 million in funding from a private firm known as Elevation Partners. An annual company report submitted by the board of directors in 2013 stated that, since Yelp’s inception, the company incurred significant operating losses. Additionally, as of December 31, 2013, Yelp had an accumulated deficit of $70.5 million. Although its revenues had grown rapidly in the past several years, increasing from $11.1 million in 2008 to $232.0 million in 2013, the directors expected that company revenue growth rate would decline in the future as a result of a variety of factors, including: The maturation of Yelp’s business and the gradual decrease in the number of geographic markets, especially in the United States, to which it had not already expanded, and you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. In addition, historically, company costs had increased every year and the management expected the costs to increase in the future periods as it continued to expend substantial financial resources on marketing, technology development, strategic opportunities and general administration[Yelp-ir.com. "Yelp Inc. - Investor Relations". Yelp-Ir.Com, 2020, -ir.com/overview/default.aspx.] [UNITED STATES SECURITIES AND EXCHANGE COMMISSION. UNITED STATES SECURITIES AND EXCHANGE COMMISSION, 2020, /Archives/edgar/data/1345016/000120677414000681/yelp_10k.htm. Accessed 15 Nov 2020.]
Graph I: Yelp Financial Perfomance
Understanding how a primary stage company makes money is important. Many companies come up with a product that meets customer needs but cannot monetize their value. Yelp provides customers with a forum for reviewing experiences of other clients when choosing a business. Instead of charging the clients, Yelp sells advertising to businesses which register on their website. Being listed is free, but Yelp charges services such as enhanced lists with videos and photos and a ‘call to action’ that allows a customer to schedule an appointment with a business. In the year 2014, the company’s local advertising contributed to $ 321 million of the $ 378 million in revenues. The other sources of revenues are brand advertising and other services which allow the business to conduct transactions and buy general advertisements. Both are rapidly growing but they continue to be but a small part of the yearly revenues.
Understanding corporate governance in high-tech companies
The Organization for Economic Co-Operation and Development states that corporate governance entails the different relationships between a company’s management, shareholders, its board and stakeholders. It is essential to note that good Corporate Governance plays a vital role in smooth operations and vibrant financial markets. The Cytonn Corporate Governance Ranking Report of 2017 linked the strong correlation between the Corporate Governance and stock returns. In light of the facts stated above, an organization can take eight vital steps to ensure good corporate governance. Firstly, a company should have a proper constitution of directors. In order to reconstitute a board, a company will have to look into the following; First and foremost, ensure the key figures such as the CEO and the chairman have the right qualifications. Secondly, the board and the committee involved need to apply independent judgment. Thirdly, ensure the board has a sense of diversity. Lastly, the board and the other committees need to reveal any conflict of interests. Corporate governance policies also state that a company should understand the rights of its shareholders. Protecting investor and shareholder rights not only guarantees innovation in a company but also grants the company a competitive edge.[Yeo-Hwan Kim, and 박준령. "An Examination On The Relationship Between Coporate Governance, Audit Quality, And Firm's Performance". Korea International Accounting Review, null, no. 37, 2011, pp. 95-120. Korea International Accounting Association, doi:10.21073/kiar.2011..37.004.] [Yeo-Hwan Kim, and 박준령. "An Examination On The Relationship Between Coporate Governance, Audit Quality, And Firm's Performance". ]
Thirdly, a company should manage its relationship with stakeholders. Stakeholders are people who are impacted by daily company decisions or the reputation of the company. The policy dictates that the board should include stakeholders when executing company strategies. This can be done by establishing a reliable channel of communication. Fourthly, the board should maintain good ethical standards. The board bears the responsibility for setting ethical standards. This can be done by putting in place a code of conduct. Fourthly, a company should be a good corporate citizen. Since companies exist in a social environment, they have a responsibility to act like good corporate citizens. This can be done by coming up with CSR programs that are at par with the business. Sixthly, a company should prioritize risk management. Risk management means identifying risks in a certain venture and taking the required steps to control any repercussions. Seventhly, a company should be transparent. Transparency in a venture attracts clients. Last but not least, a company should develop a thorough corporate government model. Following the initial steps brings about this final stage.[Cytonn.com. "Steps To Enhancing Corporate Governance". Cytonn.Com, 2020, /blog/article/steps-to-enhancing-corporate-governance.]
The Nominating and Corporate Governance Committee nominate the members of the board of directors. The committee also oversees corporate governance functions of the company and makes recommendations on corporate governance issues to the directors. Additionally, the members of the committee serve as a point of communication between non-committee directors, director candidates and the company’s managerial body. The board of directors, which is led, by a chairwoman and other directors is active, diverse and open-minded. The members are industry leaders who are established and have a wide set of skills which are relevant to Yelp. The Board also constantly reviews its composition in order to ensure the company’s goals are achieved and the various department managers are at par with the company growth strategies. Since its foundation, the company has been committed to maintaining a diverse and highly relevant board with a combination of skills ensure oversight and deliver company values to the shareholders.[Media.corporate-ir.net. Media.Corporate-Ir.Net, 2020, http://media.corporate-ir.net/media_files/irol/25/250809/cg/nominating.pdf.] [Transcribers, Motley. "Yelp Inc (YELP) Q3 2020 Earnings Call Transcript | The Motley Fool". The Motley Fool, 2020, /earnings/call-transcripts/2020/11/05/yelp-inc-yelp-q3-2020-earnings-call-transcript/.]
Yelp ensures good corporate citizenship by being an organization that delivers accurate and high quality company reviews. These reviews guarantee good sales in other organizations and help customers to feed their consumer need. Research has shown that good corporate citizenship ensures brand awareness, build customer trust and enable customer engagement and advocacy. In the case of brand awareness, a company is recognized for its initiatives as much as for its services. Offering high quality reviews helps Yelp gain a good company reputation in the industry. To add on that, customers tend to frequently promote organizations they feel are trustworthy. Transparency offers Yelp a competitive edge. It is also important to note that, good customer engagement contributes to the overall health of an organization. Yelp prioritizes risk management by stating that no reliance should be placed in the information available on the company’s website. Such statements do not include the potential impacts of a business commodity. Yelp does not bear the responsibility of such statements.[Transcribers, Motley. "Yelp Inc (YELP) Q3 2020 Earnings Call Transcript | The Motley Fool". The Motley Fool, 2020,]
Early Corporate Governance at YELP
Max Levchin was the first chairman of YELP’s board of directors since its foundation. He was the company’s largest shareholder, owning more than 1 milion shares.in 2012. During this time, many companies tried to tackle local searches over the years. However, the company board of directors decided to take on the crowd sourcing approach.  For years the company known as Zagat has been compiling anonymous user reviews, but Yelpers are given the chance to fully express their feelings on different issues and make names for themselves.
Employing the same user-generated content model that powers YouTube or Craigslist, Yelp reached into a city's every nook to reveal dentists, hidden car washes, plumbers and other necessary services that make up people’s daily lives. When people discover anything wonderful (or horrible), we like to share it with their friends about it. It is important to note that during this time, he was also the chairperson of the audit committee. Under the leadership of the CEO, the chairperson and other industry leaders who make up the board of directors, Yelp went on to take hold in major areas across 31 countries (Medium, 2020). Much of this growth is attributed to the board’s ability to protect the rights and interests of shareholders and investors. This is visible in the 2009 incident when Google started negotiating with Yelp to acquire the company at a $500 million price and Yahoo’s counter offer of $1 billion. Both offers were rejected by the board in order to defend the stakeholder’s interests. Additionally, the diverse board has led to the implementation of thorough decisions. This is seen in the board’s decision to acquire its largest European rival known as QYPE. This acquisition decreased the level of competition and increased the company’s market share. The company has grown over the years in terms of assets and returns due to the ability of the board’s ability to make thorough decisions and place the interests of stakeholders first.
YELP Ownership Structure in the US
Institutions have 85.79% of the company’s outstanding shares, a substantial enough amount to enable them to move prices of stock if they start selling and buying in large quantities especially when there is a small amount of shares available on the market. However, such short term volatility is often linked to hedge funds and other market participants. With a hedge fund holding of 10.08% stake in the company, the share prices exhibit a heightened state of volatility. The company also has approximately 596 institutional owners and major shareholders. The largest shareholders are Fisher Asset Management, Prescott General Partners, BlackRock Inc., Boston Partners and Shaw and Co. In addition to filing standard issued reports and managing debt issues, institutions owning more than 100MM under Yelp management are required to disclose all put and call holdings. Put holdings often highlight any negative sentiment and call holdings often highlight positive sentiment. Using Put\Call ratio is one of the key problems of applying institutional ownership, which channels a signifi...